Q3 2022 Earnings Conference Call
November 8, 2022 9:00 AM ET
Company Participants
Michael Neese - SVP, IR
Dave Flitman - CEO, President & Director
Peter Jackson - EVP & CFO
Conference Call Participants
Matthew Bouley - Barclays
Trey Grooms - Stephens Inc.
Michael Dahl - RBC Capital Markets
Ketan Mamtora - BMO Capital Markets
Adam Baumgarten - Zelman & Associates
Collin Verron - Jefferies
Reuben Garner - The Benchmark Company
Keith Hughes - Truist Securities
Stanley Elliott - Stifel
Kurt Yinger - D.A. Davidson
Alex Rygiel - B. Riley
Presentation
Operator
Good day, and welcome to the Builders FirstSource Third Quarter 2022 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by management and the question-and-answer session. [Operator Instructions]
I'd now like to turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.
Michael Neese
Thank you, Todd. Good morning, and welcome to our third quarter 2022 earnings call. With me on the call are Dave Flitman, our CEO; and Peter Jackson, our CFO. Today, we will review our third quarter results for 2022. The third quarter press release and investor presentation for today's call are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during the call.
The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation.
Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections.
With that, I'll turn the call over to Dave.
Dave Flitman
Thanks, Mike. Good morning, everyone, and thanks for joining our call. Our strong third quarter results reflect the fundamental strength of our business, including our value-added products and services that resonate with our customers and our consistent execution. We are winning new business and strengthening existing customer relationships by consistently providing customers tailored solutions and excellent service, which collectively make us a partner of choice.
In the third quarter, we delivered a 6.9% increase in core organic sales, including nearly 20% growth in our higher margin value-added products. That performance, combined with our investments in core operations, our relentless focus on cost controls and acceleration of productivity helped us produce record adjusted EBITDA.
On Slide 3, I would like to remind you of our long-term strategic priorities: expanding organically in value-added products and services, driving operational excellence, continuing to build our high-performing culture and growing through strategic tuck-in acquisitions.
On Slide 4, we outline how we continue to execute against our strategy this quarter. Specifically, we delivered record results in the quarter by increasing our value-added product sales. We leveraged our BFS 1-TEAM Operating System, leading to $33 million in productivity savings in the quarter. We deployed additional capital toward tuck-in acquisitions as highlighted by our recent purchases. Since the BMC merger, we have now deployed $2 billion of capital to strategic M&A.
Through October, we have repurchased $2 billion in common stock this year. We still have slightly more than $500 million remaining on our current $2 billion share repurchase authorization and we will continue to look for favorable opportunities to repurchase shares, considering market dynamics and our ongoing commitment to maximize long-term value creation. Since we launched our buyback program 15 months ago, we have invested approximately $3.8 billion in repurchasing roughly 61 million shares, retiring nearly 30% of our common shares outstanding.
Let's turn to our third quarter results on Slide 5. We delivered approximately $6 billion in net sales. Core organic sales in value-added products grew by nearly 20%, while single-family sales increased almost 2%. Repair, Remodel and Other increased over 30% and multi-family increased 16%. R&R and Other growth was mainly attributable to a weaker prior year when supply constraints limited our ability to support growth in this segment. Multi-family was driven by solid organic growth and a strong backlog of projects. Once again, value-added products drove our growth story, further validating that we are well positioned to be the supplier of choice for these products.
During the third quarter, we generated $1.2 billion of adjusted EBITDA with a margin of 20.3%. These results were driven by our strong execution, share gains, ongoing productivity initiatives and pricing discipline in a market that has been supply constrained, but is returning to normal.
Turning to M&A on Slide 6. In addition to our focus on profitable core organic growth, we continue to execute tuck-in acquisitions that are aligned with our strategy. Since the start of the quarter, we have completed four acquisitions that collectively advance our objective of expanding our geographic footprint in key markets, enhancing our value-added portfolio to better serve our customers and diversifying our end market exposure.
In September, we closed our acquisition of Trussway, which expands our footprint in multifamily trusses, accelerating our growth in the Southwest and Southeast. We also acquired Fulcrum Building Group in September, providing us with pro contractor-focused lumberyards, millwork facilities and additional resources in the high-growth markets of the Gulf Coast. In July, we closed our acquisition of HomCo Lumber and Hardware, which enhanced our footprint in Flagstaff, Arizona. Then in October, we acquired Pima Door & Supply, which provides us with dedicated millwork capabilities in Phoenix. These acquisitions represent our ability to acquire high-return assets that will boost our long-term value proposition. We're excited to welcome the HomCo, Trussway, Fulcrum and Pima teams with their longstanding customer relationships and track records of profitable growth to the BFS family.
We have spent approximately $630 million on M&A so far this year. The highly fragmented nature of our industry supports our ambition to invest on average $500 million per year for the next several years while deploying capital in a disciplined manner. As we navigate near-term market dynamics, we will continue to be acquisitive where valuations make sense. We remain vigilant stewards of capital to ensure we continue to drive long-term value creation for our shareholders.
Now let's turn to Slide 7 to discuss our pioneering role in the digital transformation of the homebuilding industry. The end of the third quarter marks just over one year since the completion of our Paradigm and Apollo acquisitions. The original Paradigm business continues to perform exceptionally well and we are investing in the long-term growth of that business.
On the homebuilder software side, we remain committed to executing our development plan to build out of our digital sales team and integration with BFS operations. As we highlighted last quarter, we successfully integrated our structural design, material takeoff and visualization models into one streamlined process for our pilot customers. We now have 18 new digital sales representatives in place with more than 330 customer meetings held during the third quarter.
And we are excited to tell you about a new technology that we will be introducing to the marketplace at the beginning of 2023, our new mybldr.com website which will provide our small builder customers easy-to-use digital tools to virtually design and build their next home and engage with key operational functions, including planning, specifying products, ordering materials and budgeting. We believe our launch of this platform will help us grow the BFS brand and build on our momentum as the supplier of choice in the homebuilding industry.
Turning to productivity. In addition to the $55 million of carryover synergies, we have delivered $73 million in savings so far in 2022 and we expect to exceed $100 million in productivity savings for the full year as we drive improvement projects and leverage our BFS 1-TEAM operating system.
Last quarter, we outlined the increased resilience of our business model, and we believe these are important points to reiterate in this current environment of macro uncertainty. In the scenario of a challenged market where housing starts are down significantly, we have many levers to pull, as shown on Slide 8 that will allow us to quickly respond, including effectively managing costs through our variable expense structure to flex expenses with demand, optimizing capacity and further streamlining our footprint, reducing discretionary spend, accelerating productivity projects and taking appropriate workforce actions.
Our scale, combined with these initiatives, allow us to operate in a much more proactive and effective manner compared to the last recessionary cycle 15 years ago.
As we have all seen in the public builder announcements, the commentary has suggested a 30% to 40% decline in order rates on average. While we had very strong third quarter results, we have begun to see a slowdown in average daily sales as higher mortgage rates and declining consumer confidence are weighing on demand and commodity prices.
Our September and preliminary October volumes were down low double digits versus a year ago, amid a significant decline in early-stage build products. As such, we quickly pulled a few levers to curb our costs, including bringing our inventory in line with evolving sales levels, putting a moratorium on nonessential travel, reducing headcount and overtime to align with volumes and rationalizing facilities. This work is never easy, and these are difficult decisions with respect to our affected team members, but we must be responsive to the market deceleration and best position the company to navigate this environment. We are proactively managing into the downturn, and we are prepared to act decisively to protect and resize the business as necessary.
We anticipate that the operating environment will remain challenging for the foreseeable future, but we are committed to strategically accelerating our leading market position, allocating capital towards value-generating organic and inorganic growth opportunities and delivering on our overall value proposition. We are confident that no matter the operating environment, we will continue to execute well, outpace the market and create long-term value for our shareholders.
As laser-focused as Builders FirstSource is on making fundamentally sound business decisions that drive value for our shareholders, we are equally devoted to supporting the communities where our team members and customers reside, especially in times of need. The past several weeks have been difficult for many due to the devastation caused by Hurricane Ian. Our hearts go out to all the individuals and families who have been impacted. We were relieved to learn that our team members are safe but saddened that a few of them suffered catastrophic damage to their homes. We stand behind each of them as they work to rebuild.
In recent weeks, we've donated over $500,000 to humanitarian organizations supporting the Hurricane Ian relief efforts. The organizations Builders FirstSource has made contributions to include the American Red Cross, Samaritan's Purse and BFS Cares, the company's emergency assistance program that helps team members who are facing hardship immediately after a natural disaster.
Moreover, I want to recognize our countless team members who have selflessly gone above and beyond to support those displaced by Hurricane Ian, with special gratitude going to our team members in Wausau, Wisconsin, who partnered with our local community to send a semi-truck filled with supplies and essentials, more than 1,500 miles to Fort Myers, Florida. It's times like these that we be truly humbled to lead such a caring and supportive organization. I extend my heartfelt appreciation to these exceptional team members and to all those individuals and organizations offering support on the ground and assisting with the relief efforts. We stand ready to support these communities and help them rebuild.
I will now turn the call over to Peter to discuss our third quarter financial results.
Peter Jackson
Thank you, Dave, and good morning, everyone. I'm pleased to report that we delivered strong financial results in the third quarter. We generated a record quarterly free cash flow of $1.4 billion and repurchased $658 million of our common stock during the quarter, all while maintaining a strong balance sheet. Our financial performance reflects consistent execution, disciplined operational management and alignment with our strategic priorities. We are operating with a proactive mindset and have enhanced our already strong expense management processes amid a challenging operating environment. Our fortress balance sheet, low net leverage profile and substantial liquidity provide us with the flexibility to navigate a dynamic but decelerating market. All the while, we are maintaining focus on creating long-term shareholder value.
I will cover three topics with you this morning. First, I'll review our third quarter results. Second, I'll provide an update on capital deployment. And finally, I'll discuss our guidance for full year 2022....
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